BUSINESS AND THE LAW

BUSINESS AND THE LAW; SMALLER FIRMS ARE VANISHING

By Tamar Lewin

Published: March 9, 1987

SAGE Gray Todd & Sims, one of the oldest Wall Street law firms, is breaking up this month, with 30 of its 78 lawyers - the banking group and the Miami office - going off to Hughes Hubbard & Reed, and another dozen lawyers from the real estate department joining Chadbourne & Parke.

Schwartz, Klink & Schreiber is in the process of breaking up, too, with 15 of its 28 lawyers leaving for Proskauer Rose Goetz & Mendelsohn.

The two firms being dismantled are very different: Sage Gray was founded in 1842, while Schwartz, Klink started only 13 years ago. But both of them, and most of New York's other firms in the 20-to-100-lawyer range, have faced similar difficulties in trying to run a general legal practice in competition with giant national firms that have hundreds of lawyers from coast to coast.

During the last five years, many well-known small and medium-size firms have vanished, including such New York institutions as Surrey & Morse; Tufo & Zuccotti; Greenbaum, Wolff & Ernst, and Marshall Bratter Greene Allison & Tucker. In Chicago, Friedman & Koven broke up; in Boston, Herrick & Smith.

Some of them have been swallowed up in mergers with large, national firms, and some have splintered, with lawyers in their different departments going off in different directions.

In many cases, the firms were doing well financially: indeed, both Sage Gray and Schwartz, Klink say their 1986 profit per partner was their highest ever. Tufo & Zuccotti, which specialized in real estate and land use, was exceedingly profitable when it merged into Brown & Wood last year.

But the changing nature of the legal business is putting increasing pressure on general-practice firms, and the future is cloudy for many.

''There's no question that all midsized firms are studying their role these days,'' said Richard Siegal, the administrative partner at Sage Gray and part of the group going to Hughes Hubbard.

The problem, basically, is how such firms can compete with the new national law firms that have a broad client base that generates a steady flow of cash and work - as well as the hundreds of lawyers and the wide network of offices that let them handle any new matters that come their way.

''Law used to be a local business, but now it's national,'' said Allen G. Schwartz, one of the founders of Schwartz, Klink. ''It's frustrating when you don't have offices in all the major cities.''

Another big problem is recruiting: even for those midsized firms that pay the ''going rate'' for beginning lawyers - rumored to be soaring to $80,000 next fall in New York - it is hard to attract the best graduates, most of whom want to join big firms.

All things considered, some lawyers say, it now takes 200 or more lawyers to maintain a top-quality general practice.

''Whereas 25 years ago, a firm of 75 lawyers could have a really general practice and provide sound legal advice to large corporate clients, that's no longer true, because of the increased complexity of the law,'' said John F. X. Peloso, Sage Gray's former managing partner who last week joined Morgan Lewis & Bockius, which has more than 500 lawyers in offices from Los Angeles to London.

Even for those who consciously chose small firms for their collegiality and entrepreneurial opportunities, there is a constant pressure to grow.

''We had to grow for several reasons,'' said Peter Tufo, a founder of Tufo & Zuccotti. ''First, the demands of our clients in areas where we were competent were so great that we couldn't service them all, and we were having to turn down new opportunities in related areas that were interesting to us. And unless we grew, our younger lawyers wouldn't have opportunities to grow and to hire people to work for them. We could have hired more people and taken more space, but it was faster to merge with a larger firm.''

Unlike either Sage Gray or Schwartz, Klink -where several lawyers were left out of the breakup plans - Tufo & Zuccotti made it a condition of the merger that Brown & Wood would take in all of the firm's employees.

''We started from nothing with no clients and no capital, and that would be harder to do now,'' said Mr. Tufo. ''And a small general practice would be difficult in New York. But I disagree with those who say small firms can't make it anymore. You just have to be clear about what kind of work you can and can't do.''